Custom, Excise & Service Tax Tribunal
M/S Micro Labs Ltd vs The Commissioner on 23 November, 2016
CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL SOUTH ZONAL BENCH BANGALORE Appeals (s) Involved: E/3088 TO 3095/2011, E/2438 TO 2444/2012 & E/27710 TO 27715/2013 (Arising out of Order-in-Appeal Nos. JMJ/32 - 39/2011 dated 05.09.2011; JMJ/54 60/2012 dated 04.06.2012 and JMJ/134 139/2013 dated 4,6,2013, passed by Commissioner (Appeals), LTU, Bangalore] M/s Micro Labs Ltd. Bangalore - 560001. Appellant(s) versus The Commissioner, LTU, Bangalore Respondent(s)
Appearance:
Mr. N. Anand, Advocate For the Appellant Mr. K.T. Pakshirajan, A.R. For the Respondent Date of Hearing: 16/11/2016 Date of Decision: 23/11/2016 CORAM:
Mr. Mohammed Yousuf, AR For the Respondent HON'BLE SHRI S.S. GARG, JUDICIAL MEMBER Date of Hearing: 30/09/2016 Final Order Nos._21265 to 21285/2016 The appellants, M/s Micro Labs Ltd., Bangalore, have filed 21 appeals against the various impugned orders passed by the Commissioner (Appeals), LTU, Bangalore, who upheld the Order-in-Originals and rejected the appeals of the appellants. Since in all the appeals the issue is identical, therefore all the 21 appeals are being disposed of by this common order. A statement showing the details of appeal-wise period involved, amounts of Cenvat credit, penalties and ISD penalties imposed in the matter is appended below : Appeal Nos. Period Involved Cenvat Credit Penalty ISD Penalty E/3088/2011 2008-09 1,23,489 1,23,489 5000 E/3089/2011 2008-09 37,427 37,427 5000 E/3090/2011 2008-09 13,551 13,551 5000 E/3091/2011 2008-09 49,065 49,065 5000 E/3092/2011 2008-09 5,68,564 5,68,564 5000 E/3093/2011 2008-09 3,72,775 3,72,775 5000 E/3094/2011 2008-09 1,038 1,038 5000 E/3095/2011 2008-09 19,777 19,777 5000 E/2438/2012 2009-10 8,71,319 8,71,319 5000 E/2439/2012 2009-10 1,27,036 1,27,036 5000 E/2440/2012 2009-10 1,03,677 1,03,677 5000 E/2441/2012 2009-10 54,704 54,704 5000 E/2442/2012 2009-10 23,56,367 23,56,367 5000 E/2443/2012 2009-10 6,08,232 6,08,232 5000 E/2444/2012 2009-10 4,79,693 4,79,693 5000 E/27710/2013 2010-11 7,22,183 7,22,183 5000 E/27711/2013 2010-11 36,477 36,477 5000 E/27712/2013 2010-11 2,34,433 2,34,433 5000 E/27713/2013 2010-11 20,19,026 20,19,026 5000 E/27714/2013 2010-11 44,187 44,187 5000 E/27715/2013 2010-11 19,13,087 19,13,087 5000 TOTAL 107,56,104 107,56,104 1,05,000
2. Briefly, the facts of the case are that the appellant is engaged in the manufacture of pharmaceutical goods falling under Chapter 30 of the First Schedule to the Central Excise Tariff Act, 1985. The appellant is a Large Tax Payer Unit (LTU) and is duly registered under Bangalore LTU Commissionerate. The appellant has factories situated at various places in India and all the factories are duly registered with LTU. The appellant has also registered as Input Service Distributor (ISD) for the purpose of distribution of input service credit. The appellant has also got goods manufactured through third party manufacturers. The appellant in the capacity of ISD purchased various input services which were service tax paid and also were common input services. Being an ISD, the appellant distributed the input service credit by following procedure envisaged under Rule 7 of the Cenvat Credit Rules. In the capacity of ISD, the appellant did not distribute any credit attributable to input services which were exclusively used for exempted goods. However, the appellant in the capacity of ISD distributed the credit attributable to common input services used for dutiable goods whether manufactured by them in their own factories or goods manufactured through the third party manufacturers. Based on the ISD challans, the credit distributed was availed as Cenvat credit by the respective factories of the appellant. Thereafter the appellant and its various factories were issued Show-Cause Notices by LTU Department alleging that the goods manufactured through third party manufacturers and sold by the appellant was nothing but trading activity and that the trading activity was neither manufacturing activity nor service activity and that the appellant was not entitled to take Cenvat credit on input services attributable to trading activity. Thereafter the adjudicating authorities passed adjudication order on each one of the factories and demanded Cenvat credit relating to common input services attributable to trading activity and also imposed mandatory penalty and penalty on the appellant in the capacity as ISD under Rule 15A of Cenvat Credit Rules. Aggrieved by the Orders-in-Original, the appellant preferred appeals before the Commissioner (Appeals) who upheld the Orders-in-Original by the impugned orders. Aggrieved by those different orders passed by the Commissioner (Appeals), the appellant has preferred these 21 appeals on identical grounds before the Tribunal.
3. I have heard both the parties and perused the material on record.
4. The learned counsel for the appellant submitted that the period of dispute in all the appeals is for the years 2008-09, 2009-10 and 2010-11. He further submitted that the trading activity was regarded as exempted service by amending definition in Rule 2(e) only with effect from 1.4.2011 and prior to 1.4.2011, the trading activity was not construed as exempted service at all. He further submitted that the said amendment is prospective and not retrospective as the Government cannot make amendment retrospectively as held by the Honble Supreme Court in the case of Cannanore Spg. & Wvg. Mills Ltd. Vs. CCE [1978 (2) ELT 375 (S.C.)]. He also submitted that during the period of dispute, the provisions of Rule 6 of the Cenvat Credit Rules was inapplicable to the appellant. He further submitted that as a consequence of the said amendment to the said Rule 2(e) effective from 1.4.2011, the Government also inserted the definition of value in the case of trading activity for the purpose of Rule 6(1), 6(3) and 6(3A) of the Cenvat Credit Rules. Consequently the machinery mechanism for reversal of proportionate Cenvat credit attributable to trading activity was introduced only with effect from 1.4.2011 onwards. He also submitted that the appellant has not availed any credit of input service which is used exclusively for trading activity; rather the appellant had distributed and took credit of only those input services which were commonly used for dutiable manufactured goods in their own factories and dutiable goods manufactured through third party manufacturers. He further submitted that even if it is assumed that trading activity should be construed as exempted even prior to 1.4.2011, but there was no machinery or mechanism to reverse or to pay proportionate credit on common input services attributable to trading activity. It is his further submission that it is well settled that when the machinery provision is not provided for then there cannot be any charge or levy or collection of amount/duty. He also submitted that the respondent has wrongly invoked extended period of limitation as the appellant has intimated about his activity to the Department in May and August 2008 itself and there was no wilful suppression or mis-statement of facts with intent to evade payment of duty. He also submitted that since the entire issue relates to bonafide interpretation of statutory provisions and there are conflicting judgments of the Tribunal on the issue and in such circumstances mandatory penalty should not have been imposed. In support of this submission he relied upon the following case laws :
(i) Marudhan Motors Vs. CCE {2016-TIOL-2576-CESTAT-DEL]
(ii) Kundan Cars Pvt. Ltd. Vs. CCE [2016 (43) STR 630 (Tri.-Mum.)]
(iii) Metro Shjoes Pvt. Ltd. Vs. CCE [ 2008 (10) STR 382 (Tri.-Mum.)] affirmed by Bombay High Court in 2012 (28) STR J19 (Bom.)]
(iv) CIT Vs. B.C. Srinivasa Setty [1981] 128 ITR 294 (S.C.)
(v) PNB Finance Ltd. Vs. CIT, [2008] 307 ITR 75 (SC)
(vi) TFL Quninn India Pvt. Ltd. Vs. CCE [2016-TIOL-856- CESTAT-HYD]
(vii) Krishna Auto Sales Vs. CCE [2015-TIOL-2994-CESTAT-DEL]
(viii) Pushpam Pharmaceuticals Co. Vs. CCE [1995 (78) ELT 401 (SC)]
(ix) Nizam Sugar Factory Vs. CCE [2006 (197) ELT 465 (SC)]
(x) CCE Vs. Kolety Gum Industries [2016 (335) ELT 581 (SC)]
(xi) In Re : Faber Heatkraft Industries Ltd. [2008 (232) ELT 182 (C.A.)]
(xii) The Cannanore Spg & Wvg. Mills Ltd. Vs. CCE [1978 (2) ELT 325 (SC)]
(xiii) ITO V. M.C. Ponnose [AIR 1970 SC 385, 388]
5. On the other hand, the learned A.R. defended the impugned orders passed by the Commissioner (Appeals) and filed written submission in support of his various contentions. The written submission of the learned A.R. is given below :
The appellant is a manufacturer of pharmaceutical products and also gets the same manufactured by other manufacturers on loan license basis. This activity of goods manufactured by other manufacturers which are common in pharma industry and the goods manufactured by loan licensee is only traded by the appellant.
The appellant avails Cenvat credit at their head office and are registered under service tax provisions as an input service distributor and distributes the credit to their manufacturing units.
There are certain goods manufactured by the loan licensees which are either exempted or non-dutiable. Appellant claims that they have neither availed any Cenvat credit on this activity nor distributed the same to any of their manufacturing unit. However, the appellant have not produced any evidence to this effect.
In respect of goods manufactured by the loan licensees and traded by the appellant from their head office/depot, there are certain input services such as security services, telephone services and other services which are common to both manufacturing units and loan license units. This portion of the Cenvat credit is not admissible to be distributed to their manufacturing units in as much as this activity amounts to trading of goods by the appellants in respect of the goods manufactured by the loan licensee. This activity is in no way connected to either manufacture or providing of output service by their manufacturing units.
The appellants have not disputed this fact and also admits that there are certain input services which are commonly availed at their head office in respect of both for their manufacturing as well as loan licensed units.
As per Cenvat Credit Rules, 2004, duty paid on input goods/input services can be availed as Cenvat credit which is used in the manufacture of final products or for providing output services.
As per Rule 2(e) of the CCR., 2004, as it stood prior to 1.4.2011 -exempted services means taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under Section 66 of the FA., 1944.
The definition of exempted services was amended wef., 1.4.2011 wherein it was defined that -exempted services means taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under Section 66 of the FA., 1944 and taxable services whose part of value is exempted on the condition that no credit of inputs and input services used for providing such taxable service, shall be taken and an explanation was also inserted to the said Rule 2(e) saying that for removal of doubts, it is hereby clarified that exempted services includes trading. The effect of the said amendment and the explanation added is that no input goods and input services which are used for providing exempted services and this amendment is prospective in nature as held in the case of B.A. Research India Ltd., VS CST., Ahmedabad reported in 2010 (18) STR 604 (Trib. Ahmd).
Therefore, before 1.4.2011, the trading was neither a manufacturing activity nor an output service. This view has been upheld by the Honble High Court of Madras in the case of M/s FLSmidthpvt., Ltd., Vs CCE., reported in 2014-TIOL-2186-HC-MAD-CX and other citations given on the date of hearing held on 7.11.2016. The Madras High Court has also upheld the suppression aspect as well in such cases, which is akin to the case on hand.
The Contentions of the appellant and the departments view are as follows:-
i) The trading was a service which was subsequently exempted with effect from 1.04.2011. This view is not correct in as much as trading is neither a manufacturing activity nor a service as per Finance Act, 1994. Therefore, question of availing CENVAT in respect of Trading activity either prior to 1.4.2011 or after that date does not arise, for the reasons given above.
ii) There is no mechanism to ascertain the value of input services attributable to Trading. This view is also not correct for the reasons that appellant knows the turn over of trading and manufacturing. According to this ratio, the proportionate credit has to be reversed.
iii) Limitation. This averment of the appellant is not tenable inasmuch as he has not furnished any details which are attributable to trading activities in any of the records submitted by the appellants. By any stretch of imagination, the department cannot ascertain the details of Cenvat Credit attributable to their trading activity from the records furnished by the appellant. This view has also been upheld by Honble High Court of Madras in the case of M/s FLSmidthpvt., Ltd., Vs CCE., reported in 2014-TIOL-2186-HC- MAD-CX.
In this view of the matter, the activity of TRADING is neither a manufacturing activity nor an output service and therefore, the common input services availed in respect of traded goods manufactured by other manufacturers i.e., in this case loan licensees is no way related to the goods manufactured and distributed to their manufacturing units.
Therefore, in view of the detailed findings given in the impugned order, the demands are sustainable for the reasons given above.
6. I have considered the submission of both the parties and has also considered various judgments cited by both the parties.
7. The learned A.R. submitted that various judgments cited by the learned counsel for the appellant are not directly applicable to the facts and circumstances of this case. He further submitted that the issue which is involved in the present appeals had already come before the Tribunal in the case of M/s Orion Appliances Ltd. Vs. CST, Ahmedabad [2010-TIOL-752-CESTAT-AHM] and the Tribunal in the said case has decided the following three issues :
(i) Whether trading activity can be called as service.
(ii) Whether Rule 6 of Cenvat credit Rules, 2002 and Service Tax Credit Rules, 2002 would be applicable when input services are used in respect of trading activity as well as taxable services.
(iii) If Cenvat Credit Rules and Service Tax Credit Rules are not applicable, the procedure to be followed by the assessee for availing input service tax credit.
After considering the submission of both the parties, the Tribunal has come to the conclusion that as regards the issue as to whether trading activity can be called as a service, it is quite clear that since the trading activity is nothing but purchase and sales and is covered under sale tax law, it may not be appropriate to call it a service. Therefore, it has to be held that trading activity cannot be called a service and therefore, it cannot be considered as an exempted service also. It is pertinent to note that the trading activity has been specifically covered as exempted service with effect from 1.4.2011. This amendment in the definition in Rule 2(e) was brought into effect on 1.4.2011 and as per the learned A.R., this amendment is only a clarification and is applicable prospectively. Further this issue whether the appellant is entitled to take Cenvat credit with regard to common input service attributable to trading activity has been recently considered by the Honble High Court of Madras in the case of M/s FLSmidth Pvt. Ltd. Vs. C.C.E. reported in 2014-TIOL-2186-HC-MAD-CX where in the Honble High Court has framed the following substantial question of law :-
1) Whether in the facts and circumstances of the case, the Tribunal was right in holding that the activity of trading to be considered as exempted service for the period prior to 1.4.2011 even though the same has been identified as an exempted activity only from 01.4.2011?
2) Whether in the facts and circumstances of the case, the Tribunal was right in giving effect to the amendment introduced to the definition of exempted service for the period prior to 1.4.2011?
3) Whether in the facts and circumstances of the case, the Tribunal was right in holding that the credit taken on input service ism liable to be reversed even though there is no specific methed of computation of value during the disputed period?
4) Whether in the facts and circumstances of the case, the Tribunal was right in holding that only the input services used directly or indirectly or in or in relation to the manufacture of taxable goods alone is eligible for credit in terms of Rule 2(1) of the Cenvat Credit Rules, 2004?
5) Whether in the facts and circumstances of the case, the Tribunal was right in quantifying the demand in a method which is not prescribed either in the Act or in the Rules?
The Honble High Court after considering the submissions raised by the assessee has come to the conclusion that no substantial question of law arises and dismissed the appeal of the assessee by upholding the decision of the Tribunal. Further the Honble High Court has categorically held that the assessee is not entitled to Cenvat credit of common input service attributable to trading activity.
8. Following the ratio of the judgement of the Honble High Court of Madras, I am of the considered view that there is no infirmity in the impugned orders whereby the Commissioner (Appeals) has denied the Cenvat credit of common input services attributable to trading activity by holding that the trading activity is exempted service even prior to 1.4.2011. Further, as far as invoking extended period of limitation and imposition of mandatory penalty, I am of the considered view that since the appellants have not declared in their ST3 Returns that input service credit was used in relation to trading activity. This amounts to suppression of facts and therefore, the extended period of limitation is correctly invoked as the appellants are following the self assessment procedure and are taking credit on their own. Therefore, keeping in view of the aforesaid discussion, I uphold the impugned orders and dismiss all the appeals of the appellants.
(Pronounced in the open court on 23/11/2016) (S.S. GARG) JUDICIAL MEMBER /vc/